Defining "Captive" Insurance

CAPTIVE (noun):  A closely held insurance company whose insurance business is primarily supplied by and controlled by owners, and in which the original insured are the principal beneficiaries.

A captive insurance company is an insurer that is organized by one or more entities, whether it be persons, corporations, partnerships, etc. for the primary purpose of providing insurance protection to its owners or persons related thereto.  A captive's policyholders can be related in a number of ways, including common ownership, common risk profile, or participation in a  common industry.  Many large domestic corporations have captive insurance arrangements, but mid-sized businesses may benefit from captive insurance arrangements as well.

DERIVATION:  Held Captive--A History of International Insurance in Bermuda, provides the following historical derivation of the term "captive".

The term "captive" comes from the father of captive insurance, Frederic M. Reiss, who coined the term in the 1950s while bringing his concept into practice.  Reiss was working with the Youngstown Sheet & Tube Company.  The company owned a series of mining operations; management referred to the mines whose output was put solely to the corporation's use as captive mines.  When Riess helped them incorporate their own insurance subsidies they were referred to as captive insurance companies because they wrote insurance exclusively for the captive mines.

A Brief Overview of All Types of Captives

Pure Captive Insurer (single parent) – an insurer that only insures the risk of its parent and affiliated companies or controlled unaffiliated businesses and can include a branch captive insurer.  This is the most common form of small captive insurance company, falling under IRC Section 831(b).

Association Captive Insurer (consortium) – an insurer that only insures risks of the member organizations of an association and the affiliated companies of those members, including groups formed pursuant to the Federal Liability Risk Retention Act of 1986.

Sponsored Captive Insurer – a captive insurer in which the capital and surplus is provided by one or more sponsors and only insures risk of its participants through separate participant contracts.

Risk Retention Group (RRG) – association or group captive formed in accordance with the requirements of the Product Liability Risk Retention Act of 1981 (as amended).

Branch Captive Insurer – an alien or foreign captive insurer licensed to transact business of insurance through a business unit with a principal place of business in Kentucky.

Special Purpose Captive Insurer – an insurer established for one specific purpose or transaction, where it is desirable to isolate the purpose or transaction from ownership and/or activities of the parties.

Protected Cell – a separate account established by a sponsored captive insurer in which the assets are maintained for one or more participants in accordance with the terms of a participant contract.